CONTENTS

PRINT THIS STORY:

CHANGE TEXT SIZE:

Off center?

Red flags can help signal trouble ahead

By Kevin Kenyon

Call it the boiling frog syndrome. Everything at the shopping center seems to be going great, but seemingly, out of nowhere, the bottom drops out, and almost nothing can be done to save it.

It's a situation that practically everyone in the business has had to deal with at one time or another, and the effects can be devastating on a portfolio.

Two malls that
took completely
different paths from 1985-1997:
Plaza Pasadena, left, and University Towne
Centre, above.

It's a safe bet that a few developers have spent many a sleepless night tossing and turning, wondering in hind sight if they should have seen it coming.

But could they have? How?

More often than not, experts say, the industry's time- honored indicators, such as net operating income (NOI), occupancy percentage, and sales per square foot, don't always tell the story.

"We may have a little bit of the 'boiled frog' syndrome," said New Plan Excel Realty Trust senior vice president and CFO Jeffrey Egertson, referring to shopping center finance professionals.

"If you put a frog into a pot of water and turn the heat up, it will literally boil to death, because it doesn't recognize the incremental change," he explained.

"On the other hand, if you put a frog into a pot of boiling water, it's going to jump right out."

While the analogy may be a stretch, Egertson, whose firm is based in New York City, believes it's a lesson that should be heeded by those whose job it is to gather and analyze shopping center data.

"Because of the small pieces of change that occur month to month and year to year, it's important to continue to step back and take a fresh look at a center, because at the end of the day, everybody has to think about how to recognize change."

In preparation for last November's ICSC Financial Management Conference in Chicago, Egertson, together with Stephen Huber of The Richard E. Jacobs Group, ranked the Top 10 items to watch out for that most often affect the performance of a center (see chart, page 248).

"What's most interesting is, that if you think about the information that we gather and report on a center on a month-to-month basis, you won't find many items on the list that we look at on a periodic basis," Egertson explained.

Most notably, NOI, which is widely thought to be one of the best indicators, was ranked near the bottom, while a center's physical appearance, usually an afterthought, ranked higher, Egertson said.

"When you look at performance reports on properties, you won't find things like physical plant being mentioned too often, if at all."

The impact of competition, which was ranked first, can't be analyzed simply through financial information either, said Huber, SCSM, management coordinator for Cleveland-based Jacobs.

"You just can't look at the financial numbers, that's only part of the story," he explained.

"You've got to be aware of new competition and be proactive about it, not reactive, and you do that by renovating, repositioning, or remerchandising your center."

By the time competition starts manifesting itself in specific numbers like NOI and sales per square foot, it may be too late, Huber said.

"Competition is the biggest reason why centers suddenly falter -- that's why we ranked it first," he added.

"The biggest lesson is that you have to respond to competition before it occurs, because if you wait until after you have competition you've waited too long."

When all is said and done, the ability to spot change before it's too late is nothing short of vital, Huber said.

"Management needs to know these things to ultimately determine whether they're going to hold properties, sell them, or invest in them, so you can't overestimate how important it is."

To illustrate the widely different paths similar centers can take, Robert Sorensen, SCSM, senior vice president of San Diego-based TrizecHahn, compared two regional malls, Plaza Pasadena in Los Angeles, and University Towne Centre (UTC) in San Diego, over a 12-year period beginning in 1985. Both were developed and owned by TrizecHahn during that period. UTC has since been sold to Westfield America, Los Angeles.

At that time, both centers were 99% occupied, and had a total invested capital of around $35 million. Both Plaza Pasadena ($214) and UTC ($211) were also similar in terms of sales per square foot, he added.

Diverging paths

Over the next 12 years, however, the centers went in two completely different directions, with Plaza Pasadena declining and UTC remaining the dominant player in its trade area.

By 1997, occupancy at Plaza Pasadena was down to 62.8%, and sales per square foot had dwindled to $178. UTC's occupancy remained at a strong 96.4%, while sales per square foot rose to $373.

According to Sorensen, a closer look reveals that signs of Plaza Pasadena's decline could have been recognized.

"One indicator is that a center needs to outperform the rate of sales growth that's occurring in its trade area [MSA], and that clearly didn't happen in Plaza Pasadena's case."

Although the mall's sales growth (12%) outperformed its trade area (5%) from 1985 to 1990, between 1990 and 1995 Plaza Pasadena was down 20%, compared to 0% in the city of Los Angeles over the same period.

UTC, on the other hand, experienced a 29% increase in sales from 1985 to 1990, while sales only grew 7% in the San Diego market. Between 1990 and 1995, when California went through a recession, sales at the center increased by 30% while San Diego experienced a 1% increase.

"The point is that it doesn't really matter whether there's a recession in the trade area, which is what happened in both Los Angeles and San Diego from 1990 to 1995," Sorensen said.

Early indicators

Another early indicator that a property's future performance could be impacted is anchor sales, according to Sorensen.

Between 1985 and 1997, anchor sales at UTC increased approximately 80%, while declining 20% at Plaza Pasadena over the same period, he said.

Between 1990 and 1995, Plaza Pasadena was impacted by the resurrection of Old Town Pasadena, while UTC faced a major expansion at Nearby Fashion Valley between 1995 and 1997, Sorenson said.

But over the entire 12-year period, he noted that only $2.5 million was invested in Plaza Pasadena, while $10 million was invested in UTC. TrizecHahn still owns Plaza Pasadena, and is evaluating development opportunities there.

"The conclusion to reach there is that un-countered competition can result in a negative impact to the property, and that capital must be continually reinvested," he said.

Another significant difference between the two centers was the percentage of new tenants over the 12-year period, as tenants at Plaza Pasadena changed by 29% compared to more than 50% for UTC.

Between 1990 and 1995, officials at UTC added Disney, Gap, Eddie Bauer, Warner Brothers, Crate & Barrel, Banana Republic, and The Museum Co., while Plaza Pasadena added Lechters, the Olive Garden, Champs and Famous Footwear.

"The lesson to learn there is that the merchandising mix must be continually refreshed, with a change out of 5% to 7% of tenancies per year, Sorensen explained.

In using the comparison, he said he was trying to make the point that sales trends are not a one-year phenomenon, and that at least a five-year window should be considered.

In that way, finance professionals can avoid the dreaded boiling frog syndrome.

"The point is that there are predictors of performance, and you can evaluate your property using some of these methods to determine which direction it's going," he said.

"Then you can take proactive steps to turn it around, so you don't wake up one morning asking yourself what happened."